Bruce Murphy
Murphy’s Law

Stealth Investors Target City’s Foreclosed Homes

Somebody wants to buy all of Milwaukee’s foreclosed homes. Should we be glad -- or worried?

By - Feb 11th, 2014 11:39 am
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Cory Nettles. Photo from Generation Growth Capital, Inc. website.

Cory Nettles. Photo from Generation Growth Capital, Inc. website.

Santa Claus is coming to Milwaukee, it seems. Some unnamed company or group of investors wants to buy up all the foreclosed homes owned by the city. That sounds  wonderful, given that these vacant homes breed crime and blight neighborhoods and are not easily turned into stable residences.

The city’s new benefactors “want to do something at a significant scale up to maybe 1,000 units or so,” according to Cory Nettles, the state’s former Commerce Secretary and founder of Generation Growth Capital. He was quoted in a Milwaukee Journal Sentinel story by  Don Walker.

The news stunned Ald. Bob Bauman. He notes the city currently has 1,295 foreclosed properties, but some of these are former office buildings or businesses and some 300 of all the properties are slated for demolition. In short, it would appear this investor or investors would be buying up every foreclosed home owned by the city. “It was very ambitious,” said Patrick Curley, the mayor’s chief of staff, in describing Nettle’s presentation.

So who are these guys? Nettles wouldn’t say. He did say his company would not be involved in the project, but presumably Nettles, who is a lawyer, was acting as their representative.

Nettles had one meeting to discuss this idea with Mayor Tom Barrett and Curley. “He presented a very broad, conceptual overview,” says Curley. “Our advice was ‘put some meat on the bones’ so we have something to react to and vet thoroughly.”

Who has the ability to buy up a city’s entire portfolio of foreclosed homes? On the one hand, Walker’s story suggests some kind of “local group” would be formed. But according to Bauman, Nettles told him “he represents some investors who buy tax foreclosed properties” and “he was going down to Atlanta to find out more.”

Atlanta, as it happens, has been a hot bed for the sale of foreclosed homes, as Bloomberg.com has reported. The Blackstone Group bought 1,400 properties in just one day. Competing with Blackstone in bidding for homes at auction was Colony Capital LLC, which “temporarily ran out of money” and “ordered $1 million more in cashiers’ checks to keep buying, since sales at the auction must be paid for on the spot,” the story noted. The firm, based in Santa Monica, California, has raised $2.2 billion to buy rental homes.

But the company is a piker next to Blackstone, the world’s largest private-equity firm, which “has spent more than $4 billion on 24,000 rental properties in the last year (as of April 2013) making it the largest buyer in the U.S.,” Bloomberg reports. The company “is leading investors in transforming an industry that historically was a mom and pop business — which Goldman Sachs Group Inc. estimates is worth $2.8 trillion… The firm last month expanded a credit line from Deutsche Bank AG to $2.1 billion for acquiring properties.” Blackstone has “hired more than 10,000 plumbers, leasing agents and lawyers” to help run the business, as another story by Bloomberg reported. ”

Blackstone, by the way, maintains one of its offices in Atlanta. In one month in that city, buyers for Blackstone, Colony Capital and American Homes 4 Rent bought almost one in three of all properties sold. “Robert Gilstrap, an Atlanta-area property investor for 21 years, said he’s shocked by the cash being thrown around,” Bloomberg reported.“It’s like Monopoly money,” he said. “You can’t compete.”

How can Blackstone make money on these deals? Its tremendous market power enables it to secure very low interest rates for loans to finance its purchases. But it is also spreading the risk in the same way that investment bankers previously packaged, sliced and sold home loans in a process known as securitization, a process that led to wholesale mortgage defaults and the financial meltdown now known as the Great Recession.

“The creation of a rental home bond has triggered concern that Wall Street is re-inventing the same tactics that crippled the financial system five years ago,” Bloomberg reported. “Economists  at the Federal Reserve already are flagging the potential for danger. While financing for rental homes is still in its infancy, the growth needs to be monitored for signs it could damage financial markets, Raven Molloy and Rebecca Zarutskie said in a report this month.”

Blackstone is a publicly-traded company “with a list of institutional owners that reads like a who’s who of companies recently implicated in lawsuits over the mortgage crisis, including Morgan Stanley, Citigroup, Deutsche Bank, UBS, Bank of America, Goldman Sachs, and of course JP Morgan Chase, which just settled a lawsuit with the Department of Justice over its risky and often illegal mortgage practices, agreeing to pay an unprecedented $13 billion fine,” as Mother Jones reported.

In other words, some of the same companies who helped cause the foreclosure crisis would benefit from buying homes that crashed in value and renting them to many of the people who lost their homes and now need a place to stay.

The impact of the mortgage crisis fell hardest on minorities, helping wipe out 53 percent of African American wealth and 66 percent of Hispanic wealth, as a study by the Pew Research Center found. “Plummeting house values were the principal cause of the recent erosion in household wealth… with Hispanics hit hardest by the meltdown in the housing market,” the study noted.  This population is likely to be among those targeted by the new mega-rental firms.

Is there any upside to the rise of this new industry? “By pouring money into properties that would have otherwise been left vacant, firms including Blackstone and Colony say they’re improving communities, and helping families rent quality houses in neighborhoods with good public schools,” Bloomberg reports.

But the publication cautioned that “There is a potential for investors to keep driving up property prices and set the stage for another housing bust. More immediately, there’s limited evidence available showing distant owners can fix broken plumbing and keep the homes in good repair.” Bloomberg also reported that Blackstone and other corporate investors were turning away low-income tenants on government assistance. Blackstone, however, said this was a mistake that wouldn’t be repeated.

Blackstone’s rental home business is called “Invitation Homes,” and a company spokesperson told me it currently owns no homes in Milwaukee. Given the size of Blackstone’s operation, Milwaukee’s stock of 1,000 or so foreclosed homes may be too small for it. But the company has also began to make deals with landlords to help finance their purchase of rental properties. Blackstone has been raising hundreds of millions of dollars through the sale of rental home bonds. It proposed to give one landlord a loan to buy 450 rental properties the company had bought in South Florida, according to Bloomberg.

“Lending to smaller landlords opens up the potential for millions of rental homes to be financed and then packaged into bonds,” Bloomberg reports. “The market for the securities may grow to $920 billion over the next six years, according to Keefe Bruyette & Woods.”

That sounds like the kind of opportunity that might appeal to Nettles and the unnamed investors he represents. So there might be cause for Bauman to suggest the city consider any proposed deal very carefully.

“This needs to be out in the open,” the alderman declares. “This could be a good deal. But it could also be a very bad deal.”

 

11 thoughts on “Murphy’s Law: Stealth Investors Target City’s Foreclosed Homes”

  1. Chris Byhre says:

    This could be a great way to move a lot of these properties back on to the tax rolls. It is worth looking into. My other suggestion would be to have a bunch of successful private schools say that they want to purchase these homes and turn them into schools. MPS would immediately sprint into action with millions of dollars in tax money to purchase them and then essentially give them to some of their cronies for “development”. Bruce could write another glowing article about the brilliance of this MPS development plan and the problem of vacant properties would be solved.

  2. Wisconsin Conservative Digest says:

    If milwaukee had decent leadership this problem would have been solved years ago. What do we have? Empty, well built houses that need work and a large group os people tht could fix them up and fill them up. What is happening, nothing? A lot of whining about money from state and a lot of nothing.
    If Tommy and some smart people had control, what they could do was to have every alderman keep an inventory, of what is in their ward, how long, what shape and what is coming from banks etc. Then we hunt up people to take control on LC or some contract if they can agree to work, fix up and work to give them title when done. Alderman can then watch over them. People will respond. Instead all we hear is whining. Problems can be solved if people want to do it. People that do not care except for some govt. solution will then justt sit there and blubber. That is what has happened.
    We need leaders and both th e city and the businesses have failed us and that is why we are in the top ten in violence, poverty and mismanagement.

  3. Eric Jernberg says:

    It’s very tricky for investors who have not rented in the central city to start buying inner city rentals. Many times landlords who have had success in areas with more wealth, fail in the inner city. What they don’t take into account strongly enough, is that most of the low income renters are “judgment proof”. That is you can take them to court and get paper that says they owe, but they can not be garnished because their income is too low.

    I am not sure who the investors think they will be renting to, but I don’t think the areas where many of these properties exist, will draw in any “sububan pioneers”.

    I think that Milwaukee is especially hard hit as many of these duplexes where built for homeowners during Milwaukee’s socialist mayors era. A unit upstairs could house your mother-in-law, and cut family costs, making home ownership possible for lesser income families.

    As the city changed, these properties have been taken over by absent landlords ( no on site manager) and these duplexes have taken a beating. I am not sure the answer is to bring back all these two family buildings, but to replace the city rental housing market over the years with smaller apartment buildings with on site managers.

  4. Jan Pierce says:

    I’ve been watching this trend pick up steam. It’ll be sold as a quick fix to a multitude of problems, but we’ll be paying for this “solution” for years. What really gets me, and Bruce touched on this, is that it’s virtually the same people making money, in virtually the same way they did before, with the same people picking up the tab, with promises that “this time it will be different.” I think it’s going to end very badly.

  5. ground zero says:

    Yeah, several years ago Cleveland and Buffalo among other cities figured out how to constructively address. Part of it was getting the city attorneys to drag the banks into court. So what do Milwaukee dozens of city attorneys do all day? Seriously, what do they do?

  6. Michael Henry says:

    As local real estate broker and investor I have sold and purchase many city owned homes. There are local investors who are willing to take on the challenges of buying, rehabbing, and renting city owned property. I believe, as someone already mentioned, without local help and direction, given the locations of many of the city’s housing inventory many out-of-state investors might not know the right areas to invest in and have problems if they buy in the wrong areas. Milwaukee neighborhoods differ by block by block. Many local investors will purchase a property on 43rd and Burleigh but not 42nd and Burleigh. In addition, these areas are where must government assistance renters live and many large companies don’t want to rent to people who are on this type of assistance. I think where the opportunity is, for more local investors to get involved and for the city to work with more small local invest groups selling a few houses at a time.

  7. Annie says:

    It doesn’t sound like a good idea to put so many properties in our city into the hands of a group with no other stake in our city than generating as much rental income as possible across as many properties as possible (if the guy is going to Atlanta to find out more, it certainly doesn’t sound like a group of local investors). It could be a big risk on the City’s part in terms of the overall impact and domino effects–on housing conditions and property values, depending on how the group’s ownership would impact the condition, maintenance, and value of these properties and their surrounding neighborhoods, or on safety, crime, and quality of life, depending on how rentals are managed, tenants are screened, and problems (such as drug houses or nuisance activity) are taken care of. The City could end up with a huge, mega-scale absentee slumlord on its hands in the worst case. Not that mass vacant properties are great, either. But I hope the City would be careful with something like this and look carefully beyond the tempting dollar signs. If the same group has done similar mass-purchases elsewhere, I’d definitely want to look into the details of how they are managing the properties there. Talk to municipalities, tenants, neighbors…really find out. Why not a local homegrown initiative with interest in Milwaukee itself that could raise investment money more locally to purchase and take care of chunks of these properties? I’d hate to see more value just extracted out of Milwaukee by rental property owners for whom it’s simply a financial investment only and who don’t treat the properties as real, living homes and neighborhoods or care anything else about the City, because that’s enough of a problem already.

  8. Bruce Hall says:

    Does Milwaukee have a housing authority with a viable master plan for these units that has been reviewed by its government and residents? Has Milwaukee demonstrated the tactical and practical knowledge for reintegrating these units into part of the tax base and housing base? Is there a present demand for these homes as rental units without significant investment beyond the foreclosure prices? Does the city have an adequate inspection department to ensure that these buildings meet code before being rented… and is that department going to be an impediment or an ally in their upgrading?

    Now if the answer is, “I don’t know,” then critics of private enterprise willing to risk private funding in a calculated chance that there will be a satisfactory return on investment should do their homework. What is the risk to the city if these homes are purchased, renovated, rented, and then the company discovers it can’t make a profit and is forced to sell these renovated buildings for whatever it can get? Is the concern that a large company might make profit from renters? Is there a fear that a large corporation might not be as easy for the government to control as individuals? What’s the downside? Be specific, not some vague “housing bubble” rhetoric.

  9. Kyle says:

    I like how we’re simultaneously afraid of another housing bubble and worried about lowering property values if these ownerless properties aren’t well maintained. I’m not sure both fears can be realized.

  10. warmmidwest says:

    This is the next get rich scheme for Wall Street. If it’s not clear that this is part of a larger campaign to crush the middle and lower classes into serfdom, I don’t know what more evidence is needed. The corporate bankers set up the mortgage crisis – Phase 1; then buy up the foreclosed homes, again securitize the assets and sell to investors – Phase 2; establish unrealistic rental goals, like 95% occupancy and average rent of $1,200 / month, do not invest in rehabing the properties, much less upkeep (which they’ve done in other states already), thus creating an investment crisis and asking the taxpayers for a bailout, yet again – Phase 3.

    It’s being done on purpose … for profiteering at the expense of vulnerable communities.

    Here’s a well researched and resourced article about what’s going down throughout the country with this business scheme.
    http://www.motherjones.com/politics/2013/11/wall-street-buying-foreclosed-homes

  11. wisconsin Conservative Digest says:

    Ironic isn’t it. The Left creates the problems than cannot fix them. We have foreclosed homes cause the Clintons pushed a loan program for home money to anyone that could scratch up 5% or so and when these subprime loans failed the market fell apart and almost took down the Republic. To be sure Bush and co wrote letters but failed to guts it out and force the problem when in office. Now that the we hve all those homes Barrett and co. has no anwsers. With median income falling 6.5% under Obama they cannot give them away, as is. Do not worry they will not solve the problem and will end up tearing good homes down.
    Obama advertises that he is the savior of the middle class and the working poor and he has destroyed them.

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